Pa. Capital's Bankruptcy Could be Long, Difficult

The years-long buildup of debt in Pennsylvania's capital city to transform its aging, polluting trash incinerator is headed for a fight in a federal bankruptcy court, where the outcome is far from clear and could be years away, not to mention costly.

The filing came after two years of politically charged efforts to deal with a looming debt that dwarfed Harrisburg's annual operating budget and the city's ability to pay. That compounded the city's history of unwise spending decisions.

"Being in bankruptcy court just confirms the reality that we're living under," said Neil Grover, a lawyer who lives in the city and co-founded the taxpayers' group Debt Watch Harrisburg. "It's just been a long, slow train to get here."

The trash incinerator began operating on the city's industrial southern edge in 1972, generating steam heat for steel mills and downtown office buildings. In the 1980s, it began generating electricity.

But it was beset by environmental problems and fines for years. It also spewed cancer-causing dioxins into the air, and pressure from the U.S. Environmental Protection Agency led to the plant's shutdown in 2003 with about $100 million in debt already piled on it, some of which went to finance other city projects.

Faced with the decision to abandon it and clean up the site, or finance a $125 million, four-year overhaul, City Council voted for the latter in hopes that it would one day emerge as a profitable investment.

Now-Mayor Linda Thompson, who was on council at the time, wept when she cast her vote for the overhaul.

But the renovation went awry, the city needed to borrow tens of millions of dollars more to complete it, and the incinerator didn't become fully operational again until 2008. Today, Harrisburg city residents pay among the highest trash-disposal rates in the nation, while the facility doesn't generate nearly enough money to pay the debt.

At the same time, Harrisburg has had to patch holes in its operating budget year after year and it's still unclear if the bankruptcy battle will be successful for the Susquehanna River city of about 50,000 about 100 miles west of Philadelphia.

Widener University law professor Juliet Moringiello said Thursday that a successful bankruptcy court fight could force some of Harrisburg's bondholders to accept less than they are owed.

"The benefit is creditors who might otherwise not voluntarily compromise might be forced to," Moringiello said.

But Chicago-based bankruptcy lawyer James Spiotto said that outcome is unlikely.

"If there is no other alternative, (bondholders) realize that people can't pay what they can't pay, and they'll work through that," Spiotto said. "So, in the past there have been some concessions, but they're very rare and they're voluntary."

There will lawyers' bills to pay and damage to the city's reputation as a borrower, Spiotto and Moringiello said. Plus, it doesn't guarantee a pain-free solution for the city, or even that the city will be able to negotiate any kind of solution to the debt, they said.

The first matter for Judge Mary D. France will be to determine whether City Council's filing even belongs in court.

The City Council voted 4-3 on Tuesday night to hire a lawyer to make the filing. Thompson, Gov. Tom Corbett and a lawyer for Dauphin County commissioners see the filing as illegal.

It came two months after the Legislature moved to outlaw such a filing, and a week before the state Senate is expected to take up a bill, already passed by the House, that would authorize Corbett to assume many of the city's financial functions in response to the stalemate between Thompson and the council majority.

The bill also would prevent Harrisburg from seeking court approval of a tax on commuters, a provision sought by suburban legislators.

The bankruptcy filing lists the principal amount the city has guaranteed on the incinerator at about $242 million, with $65 million past due.

The City Council members who supported the filing had rejected as inadequate previous efforts by a state task force and Thompson to resolve the debt. They pressed for stronger concessions from the county, which has backed part of the debt, and the bond insurer, Assured Guaranty Municipal Corp.

In a statement Wednesday, Assured Guaranty said it believes Harrisburg is specifically prohibited from filing for bankruptcy.

Whatever course Harrisburg's debt takes, many city residents are resigned to a reality of higher taxes.

"The question is," said Grover, "doing it in a rational way that doesn't kill us and the businesses here."

The years-long buildup of debt in Pennsylvania's capital city to transform its aging, polluting trash incinerator is headed for a fight in a federal bankruptcy court, where the outcome is far from clear and could be years away, not to mention costly.
The filing came after...